Opinion: If banks don’t embrace Open Banking the boat may leave without them.
Abstract
Open Banking is a key topic in 2022 for many in the finance industry (see the Rubix Basics post here for a quick intro on what Open Banking is). In my experience it has been talked about a lot, regulators want it, banks realise its importance, but the potential impact to the bank’s hold on a customer is immense.
In the interests of self preservation (and as they say in the interests of protecting customers) the Banks have been taking this topic as slowly as only they can with roadmaps spanning years, and ultimately leaving some clever little Fintechs a gap in which to solve the customer problem, albeit without permission.
And with the looming blockchain on the horizon there is a real danger that banks will miss the boat if they don’t hurry up and open up.
Regulation Pending (or in some cases already here)
First and foremost, let me say that Open Banking likely wouldn’t exist if it weren’t for regulation. It is not in a bank’s interest to open up their infrastructure for any one else to leverage. They have built it, secured it and they make their money from customers being locked in.
Currently in many markets, industry groups have come together to agree upon standards. Standards which play nicely with old, proprietary infrastructure and intended to enable capabilities that were unheard of when these systems were designed.
In some markets, it has advanced beyond that and basic API access standards have been agreed upon and launched by the majority. The UK is one example, which has spurned on a variety of account to account/Open Banking payment platforms. It’s likely that new and innovative solutions will come through to market in the coming years on the back of this open infrastructure.
In other markets, the differences in infrastructure capability, lack of desire to negotiate on pricing, or general lack of priority have hampered any real progress. In many respects the industries are no further than they were 3+ years ago.
To the countries where this is the status, there is now a risk to the banks on two fronts:
- Customer permitted tokenisation
- Web3
Customer Permitted Tokenisation
When something is hard, priced incorrectly or unnecessarily disallowed there is a chance that the innovative humans among us will find a work around.
That is what happened when it comes to bank access and it was very successful for one particular example, Plaid.
Now, I’ll stop short of calling them the bootleggers of personal finance but it’s a still a good story.
What Plaid did was realise that they could replicate the authorisation process for banking apps, and push certain functions through to the servers of the bank. Think of it as using the banking app’s own ticket to access backstage.
It was a repeatable process and allowed them to access (with permission of the user) and interact, getting transaction data, account data and even enact payments.
Basically what they did was provide the functionality of open banking through a back door, using the user’s own keys.
There are similar businesses across other markets, those that have put the effort into protecting customer data and basically creating viable alternatives to Open Banking, before Open Banking was regulated.
It’s not without risk, but in the absence of sanctioned access for product builders and customers it works. It also removes any financial benefit to the bank.
Web3
I am placing a bet that I will be able to live my life at some point in the near future without using a banking app as a daily driver.
This is huge in underbanked and unbanked societies where cryptocurrencies have shown true benefits to users. Already solutions based on Bitcoin are live, allowing trust and financial transfers in countries where users just cannot access a bank account.
But even in advanced markets, there is going to be increasing demand for companion Web3 (decentralised) accounts outside of the traditional banking system. Web3 offers basic benefits such as lower international processing costs and greater customer sovereignty over their assets. These assets could be more speculative classes such as Bitcoin or Ethereum or stablecoins pegged to an already circulating currency.
Right now, there are some challenges for Web3 in terms of operating pure transactional accounts. Decentralisation costs more, as the security of a Web3 network is generally provided for by verifiers. The more verifiers that are required (i.e. more decentralisation) the more each transaction needs to cost to make it financially worthwhile for each of them.
That wont be the case forever, however, with new Ethereum Layer 2 solutions promising to cut transaction costs to cents while maintaining decentralisation. Having used apps on this architecture, it feels smooth and stable — a far cry from what I was using early in 2021.
What Could Happen?
Basically for a bank there is a risk that their customers no longer interact with them, at all.
New, faster moving platforms may be able to do what banks have been struggling to do — engage with younger demographics and future earners. They can do this without any historical technical debt or large corporate overheads.
Coupled with non-bank lenders (whether mortgage backed, or Decentralised Finance/DeFi) there is a possible future where every single financial need can be met through new non-bank channels.
I wouldn’t write the big guns off just yet, but progress is certainly being made without them, and it is up to their own appetite whether they want to participate in these new ecosystems, and how. Opening up their performance grade APIs to Open Banking payment platforms is the first step.
